When your retirement plan uses automatic enrollment, eligible employees are automatically enrolled in the plan at a default contribution rate on their plan entry date. Employees can choose to opt out or select a different contribution rate at any time.

Important:

  • For plans effective before December 29, 2022, automatic enrollment is an optional provision that your company may choose to adopt.
  • For plans effective on or after December 29, 2022, automatic enrollment (and in most cases, auto-escalation) is mandatory under SECURE Act 2.0 unless your plan qualifies for an exemption.
  • Please see our article Automatic Enrollment Requirements for 401(k) Plans Under SECURE Act 2.0 for more information.

If your plan also includes automatic escalation, employees who have not opted out or set their own contribution rate will see their contributions automatically increase by 1% each year, according to your plan’s design.

Who This Applies To

This information applies to plan sponsors and administrators responsible for overseeing 401(k) plan enrollment and payroll updates.

How Automatic Enrollment Works

  • Default Contribution Rate: Employees are enrolled at the plan’s default contribution rate on their eligibility date.
  • Employee Options: Employees may opt out or adjust their contribution rate at any time through their online portal.
  • Annual Notices:
    • By December 2, automatic enrollment notices are posted online. Eligible employees receive an email that their notice is available.
    • Employees approaching eligibility receive a separate email with instructions to enroll, opt out, or adjust their contribution.

Auto-Enrollment Options by Plan Type

  • Plans with Auto-Escalation
    • Employees are automatically enrolled at a deferral rate of at least the statutory minimum of 3% (which cannot be lowered). 
    • Contributions then increase annually according to this schedule:
      • Years 1 & 2: 3% (no increase between year 1 and 2)
      • Year 3: 4%
      • Year 4: 5%
      • Year 5: 6%
      • Year 6: 7%
      • Year 7: 8%
      • Year 8: 9%
      • Year 9: 10% (Simply Retirement plans may escalate up to 15%)
  • Note: For plans effective before December 29, 2022, escalation may stop at 6%. Under SECURE Act changes effective January 1, 2025, escalation must continue up to 10%.
  • Plans without Auto-Escalation
    • You may be able to select a flat automatic deferral rate between 6% and 15%, depending on your plan’s effective date and design.
    • These rates vary based on your specific 401(k) product with Ubiquity.

Why Auto-Escalation Matters

Many employees need to save 6–15% of their income (depending on when they start saving) to meet retirement goals. Auto-escalation helps employees gradually increase savings, overcome inertia, and improve nondiscrimination testing outcomes.

Safe Harbor Automatic Enrollment vs. QACA Automatic Enrollment

There are two common types of automatic enrollment arrangements with safe harbor provisions:

  1. Safe Harbor Automatic Enrollment (Basic Safe Harbor Plan with Automatic Enrollment)
    • Provides employees with a mandatory employer contribution (either a safe harbor match or non-elective contribution).
    • Employees are automatically enrolled at a default rate (often 3%) unless they opt out.
    • Employer contributions are always 100% vested.
    • Eliminates the need for most nondiscrimination testing (ADP/ACP tests).
    • Match Requirement: Employers must contribute up to 4% of pay under the traditional safe harbor match formula.
  2. Qualified Automatic Contribution Arrangement (QACA)
    • A special type of safe harbor plan that must include automatic escalation up to at least 6% by year 5 (and up to 10%–15% by year 10).
    • Employer contributions may be subject to a vesting schedule of up to 2 years (unlike standard safe harbor, which is always 100% vested).
    • Requires annual employee notices explaining the automatic enrollment and escalation features.
    • Special Match Formula: Employers can use a reduced safe harbor match formula that guarantees up to 3.5% match, instead of the traditional 4% match required under the standard safe harbor rules.

QACAs are designed to encourage higher employee savings while giving employers slightly more flexibility with both contribution levels and vesting.

What Happens if Employees Opt Out

If an employee opts out of automatic enrollment:

  • No deferrals will be taken from their pay.
  • They can re-enroll in the plan later if they choose.
  • They will still receive required annual notices reminding them of their eligibility.

As the plan sponsor, you are responsible for ensuring your payroll system reflects opt-out elections so contributions are not incorrectly withheld.

What Happens If Automatic Enrollment Is Not Implemented

If you fail to automatically enroll an eligible employee who has not opted out:

  • The Department of Labor (DOL) and IRS consider this an operational error.
  • You may be required to correct the error by:
    • Making a Qualified Nonelective Contribution (QNEC) to the employee’s account to make up for missed deferrals, plus
    • Making any missed employer matching contributions the employee would have received, plus
    • Adding lost earnings to both employee and employer contributions.
  • Correction is typically handled under the IRS’s Employee Plans Compliance Resolution System (EPCRS).

Extended Correction Period for Automatic Enrollment Plans:

  • Normally, missed deferrals must be corrected quickly to limit employer liability.
  • However, for plans with automatic enrollment or automatic escalation features, the IRS allows an extended correction period of up to 9½ months after the end of the plan year in which the error occurred.
  • If corrected within this timeframe, the employer may avoid having to contribute the 50% missed deferral QNEC (though missed match and lost earnings are still required).

Promptly identifying and correcting errors can minimize required corrections and avoid IRS/DOL penalties.

Plan Administrator/Sponsor Responsibilities

If your plan includes auto-escalation, Ubiquity will provide a list of affected employees and their updated deferral amounts by December 1 each year.

To ensure payroll accuracy:

  1. Log in to your account.
  2. From the left navigation menu, click Reports.
  3. Select Employee 401(k) Elections.
  4. Forward the report to your payroll company or update your payroll system.

Note: Plans with 360° payroll integration are updated automatically. If your plan uses a flat rate arrangement, these steps do not apply.

Need Help?

For more details on your plan’s auto-enrollment settings or to review/update your configuration, please contact us.